Resolution Needed

I’m always careful about sharing sensitive information my insiders pass along unless I can get someone of authority to confirm it on the record. But I’m going to make an exception this month, because I think it will drive home a key point the National Automobile Dealers Association (NADA) made regarding the interpretive rule the U.S. Department of Defense (DOD) issued Dec. 14 under the Military Lending Act (MLA).

Just to recap, the DOD’s rule amended three of the “Q&A” format interpretations (and added one) it issued in August 2016 in response to questions raised about compliance with its July 2015 final rule implementing regulations of the MLA. One of those interpretations, Q&A No. 2, clarified that including credit-protection products like GAP in a credit transaction involving servicemembers or their dependents would take it outside the scope of the motor vehicle finance statutory exclusion and subject the deal to the MLA’s requirements and restrictions.

Well, according to my sources, a number of trade organizations representing dealers, finance sources, and F&I product providers had a productive meeting with the DOD last month. The bad news is it could take 14 to 18 months before anything happens. See, one of the officials the associations met with was confirmed to his post less than a month before the DOD issued its rule. That means this individual will need time to digest the rule, its impacts, and the points raised by the associations.

By the way, I’m hearing it wasn’t the performance of products like GAP that gave them a bad name. The issue is rooted in the Consumer Financial Protection Bureau’s review of the payday lending markets, an examination that expanded to indirect financing sources and their debt-collection practices. Well, after the CFPB took action against one finance source in particular (it specialized in loans to servicemembers), the regulator discovered that the finance company wasn’t canceling F&I products and taking chargebacks when loans ended up as a repossession. Unfortunately, GAP was found in a lot of those deals.

Now, you can wait and hope for a resolution to this issue or you can do what the NADA recommended in the memo it sent to members shortly after the DOD issued its interpretive rule. This brings me to the reason I decided to share my insider information.

See, the NADA never said you couldn’t sell GAP and other credit-protection products to military members and their dependents. It simply said that dealers should consult with legal counsel to determine whether to continue offering such products to military consumers and their dependents. If the decision is “Yes,” the NADA further advised members to consult legal counsel to determine what actions need to be taken to comply with the MLA’s requirements.

Remember, the DOD’s announcement caught everyone off-guard. Dealers and finance sources didn’t have time to establish processes for identifying covered borrowers, calculating the military annual percentage rate (MAPR), and making disclosures in compliance with the MLA. Nor did F&I product providers have time to adjust their contracts regarding the MLA’s arbitration provisions. That’s why several finance sources issued bulletins telling dealers they wouldn’t accept any loans with GAP, credit insurance, or disability included.

But solutions are coming. The Academy, an F&I training school out of Austin, Texas, claimed to have a legally sound process for complying with the MLA’s disclosure requirements. Search “The Academy” to check out the firm’s video. F&I product providers are also beginning to offer guidance. Even F&I software makers are making adjustments.

Darwin Automotive announced last month it added a question to the interview portion of its F&I platform. It asks customers if they’re an active-duty servicemember or a dependent of a military consumer. If the answer is “Yes,” the company’s smart disqualify technology automatically removes products that would subject the transaction to the MLA’s rules and restrictions.

Now, before you greenlight any process or tool, check with legal counsel. Do the same you’re your finance sources. Unfortunately, getting them to sign off on whatever process you come up with will be challenging. What has them spooked, according to my sources, is there is no surefire way for them to verify that their dealers met the MLA’s disclosure and MAPR calculation requirements. But that’s why you need to be in constant contact with them regarding this issue, especially if this thing drags out into next year. Personally, I don’t think it will.

Bottom line, a resolution is needed, because the DOD’s interpretive rule applies to all contracts dating back to Oct. 3, 2016. Yeah, that’s not good.